Sea life

Cartoon by Jonesy 

Feeble US recovery due to Trump

This chart shows the average of the PMI and ISM indices for the US (before 2011, it's the ISM alone), broken up into the services and the manufacturing sectors, and the average of the two, shown by the blue line.  (The relationship between the "whole-economy" PMI/ISM index and GDP is shown in the bottom chart, from 2000 to 2026, but I haven't updated the GDP data to include the latest release.)

After previous slowdowns or recessions, the rebound from the low point has been strong.  This time round it has been feeble.  Note how at the beginning of 2025, a strengthening recovery was aborted by Trump's tariffs.  Then, just as the economy started to pick up again, Trump's Iran war has caused a renewed downturn.  Now, so far, it's only one month of slowdown.  But if the Iran war and the oil blockade continue, which seems all too likely, this downtrend will continue.

The 1973 and 1979 oil crises produced deep recessions and strong inflation surges.  It looks as if this will happen again.

click to enlarge

Click to enlarge

Talks with Iran are going so great

 By Christopher Downes

Dire straits of Hormuz

 By Patrick Blower

I've got a plan

 By Patrick Blower

Raising the flag

 By Mike Luckovich

This is of course in reference to the famous image "Raising the flag at Iwo Jima", from the second world war.

Fossil fuels need 500 times more mining

Canadian oil sands

 

 From Distilled

Decarbonizing the world’s economy will require an enormous amount of minerals like copper, lithium, nickel and cobalt. Everything from electric vehicles to solar panels to transmission lines will require these raw materials.

In some cases, mining these minerals has disastrous consequences for workers, indigenous communities, and the environment. This has led some clean energy skeptics to argue that decarbonization will be bad for both humans and the environment.

But transitioning to clean energy will mean we no longer have to mine and extract vast quantities of fossil fuels each year. A clean energy transition will help us avoid the worst effects of climate change; it will save millions of lives currently lost to air pollution each year; and, importantly, it will reduce the total amount of environmentally and socially harmful mining each year.

In 2020, 7 million tons of minerals were mined globally for low-carbon energy, according to the International Energy Agency (IEA). (These are often referred to as “transition minerals.”) In order to limit warming to 2 degrees celsius, we’ll need to scale up that production to about 28 million tons per year.

That’s a lot of transition minerals. But how does it compare to the mining and extraction of today’s fossil fuel economy?

Every year, about 15 billion tons of fossil fuels are mined and extracted. That’s about 535 times more mining than a clean energy economy would require in 2040.

Part of the reason for this massive difference in mining requirements is the fact that fossil fuel infrastructure is much less energy efficient than clean energy technology. Gas-powered cars are three times less efficient than electric vehicles. Gas furnaces are three to four times less efficient than heat pumps. Coal, oil, and gas all need to be transported long distances from mine or well to the source of combustion.

A clean energy economy just requires much less energy than a fossil fuel economy.

But there’s another important reason for this difference. Fossil fuel infrastructure requires constant fuel input. Building a coal or gas power plant, like building a wind or solar project, requires a lot of materials and energy input upfront. But for a fossil fuel power plant, construction is just the beginning. In order to generate power, you need to burn coal or gas every day for decades. Wind and solar projects, by comparison, don’t require any ongoing fuel input.

Still, both the environmental and human impacts of mining minerals for the energy transition can’t be ignored. Policymakers should use every tool available to both minimize the total amount of clean energy minerals needed in the future and ensure those minerals are mined in socially and environmentally-friendly ways.

But make no mistake: transitioning away from fossil fuels is one of the most effective ways to protect both the environment and the most marginalized communities in the world.

Russian economy starts to spin out of control

 I  (and Bloomberg and Trading Economics) can no longer find the MOEX stock exchange index for Russia, or the yield on Russian bonds.  Trading Economics makes an estimate of the index value, but warns it might not be 100% accurate.   An absence of information is invariably a bad sign.  People are happy to share good news, not so much bad news.

Meanwhile, inflation is picking up.  (The central bank of Russia's inflation target is 4%.)

The 2014 inflation was caused by a collapse in the oil price, leading to a plunge in the rouble.  The 2020 spike was of course caused by the invasion of Ukraine, once again leading to a collapse in the rouble.  Given the loss of life and overall casualties among young men, now estimated at over 500,000, and the tightness of the labour market  (real wages are still rising fast--one way Putin is buying off his population), the only surprise is that inflation isn't higher.

Insiders are selling the share market (foreigners can no longer buy or sell Russian shares because of exchange control and American sanctions), while bond yields were trending sharply higher (until the data were no longer available), usually an indication of worsening problems.

The rouble has strengthened moderately from its lows, which seems unsustainable given the inflation build up.  If oil and gas prices start to fall, as happened in 2014, the wheels will come off. 

I don't know whether oil and gas prices will plunge in the short term, but the medium-term future is surely very bleak, given the global growth of EVs.  And the short-term may be no better.  There was no major economic event that caused the 2014 oil price plunge, just a moderate decline in global economic activity.  Given the impending Chinese recession/slowdown, and sluggish recoveries in Europe and the US (?), a near-term plunge in the oil price, comparable to 2014, is surely at least possible.

Note log scale

Note log scale

Wind turbines are friendlier to birds than oil and gas

From The Economist

Birders get nervous when they see landscapes covered in wind turbines. When the wind gets going, their blades can spin at well over 200km per hour. It is easy to imagine careless birds getting chopped to bits. Campaigners often point to the possibility when opposing the building of new wind farms.

No one doubts that wind turbines do indeed kill at least some birds. But a new analysis of American data, published in Environmental Science & Technology, suggests the numbers are negligible, and have little impact on bird populations.

Wind power has expanded dramatically in America over the past 20 years, from 2.6 gigawatts of installed capacity on land in 2000 to 122 gigawatts in 2020. Many studies have analysed the effects in specific locations or on specific bird species. But few have looked at the effects on wildlife at the population level. Enter Erik Katovich, an economist at the University of Geneva. Dr Katovich made use of the Christmas Bird Count, a citizen-science project run by the National Audubon Society, an American non-profit outfit. Volunteers count birds they spot over Christmas, and the society compiles the numbers. Its records stretch back over a century.

Dr Katovich assumed, reasonably, that if wind turbines harmed bird populations, then the numbers seen in the Christmas Bird Count would drop in places where new turbines had been built. He combined bird population and species maps with the locations and construction dates of all wind turbines in the United States, with the exceptions of Alaska and Hawaii, between 2000 and 2020. He found that building turbines had no discernible effect on bird populations. That reassuring finding held even when he looked specifically at large birds like hawks, vultures and eagles that many people believe are particularly vulnerable to being struck.

But Dr Katovich did not confine his analysis to wind power alone. He also examined oil-and-gas extraction. Like wind power, this has boomed in America over the past couple of decades, with the rise of shale gas produced by hydraulic fracturing, or fracking, of rocks. Production rose from 37m cubic metres in 2007 to 740m cubic metres in 2020.

Comparing bird populations to the locations of new gas wells revealed an average 15% drop in bird numbers when new wells were drilled, probably due to a combination of noise, air pollution and the disturbance of rivers and ponds that many birds rely upon. When drilling happened in places designated by the National Audubon Society as “important bird areas”, bird numbers instead dropped by 25%. Such places are typically migration hubs, feeding grounds or breeding locations.

Wind power, in other words, not only produces far less planet-heating carbon dioxide and methane than do fossil fuels. It appears to be significantly less damaging to wildlife, too. Yet that is not the impression you would get from reading the news. Dr Katovich found 173 stories in major American news outlets reporting the supposed negative effects that wind turbines had on birds in 2020, compared with only 46 stories discussing the effects of oil-and-gas wells. Wind turbines might look dramatic. But their effect on birds is not.

 

Oil companies' tiny spending on renewables

 So small you can barely see it on the chart.

Yield curves point towards a recession

.... but they have at least stopped falling.

The yield curve as I measure it here is the bond yield less the Central Bank discount rate.  The data for the world is a GDP-weighted average representing countries which make up ±72% of world GDP.  The yield curve leads economic activity by a year or so, but the lag does vary from cycle to cycle.  If we ignore the GFC (which is, however, the closest to the situation we have now)  the lag averages 8 or 9 months, but the median lag is about one year.

The GFC downturn was extended and deepened when the Fed let Lehman's go, causing a banking crisis and a credit crunch, and that would have delayed the lower turning point of the cycle.   Needless to say, there is no guarantee that there will not be another banking crisis, though Central Banks will have learned from past mistakes.  Maybe.  

At any rate, whatever the lag, yield curves are more negative than they have been in 25 years, globally and in the US.  And the rate increase cycle isn't over yet.  The last time (on my data) that the US yield curve was this negative was before the deep 1974 "Great Recession" and double dip 1980 to 1982 recession.  In both those recessions, the downturn was exacerbated by the preceding oil crises.  Of course, we also had an oil crisis in this cycle, with the invasion of Ukraine.  And the effects on inflation of the surge in commodity prices, including oil, are still with us.  

Even though yield curves appear to be troughing, that doesn't mean that the world economy will start recovering immediately.  Don't forget the lags involved.

Fossil fuel price fall as world econ slows

 ... and perhaps, as EVs reduce oil demand and renewables reduce coal demand over and above the decline due to a slowing economy.

The coal price is falling fast:

Russian business confidence plunges

 Up till now, Russian economic data (at least those that the government continues to publish) have held up quite well.  This has led some commentators to conclude that the government is fudging the stats, which is entirely possible.   Business confidence (seasonally adjusted) plunged in February 2022 when Russia invaded Ukraine, then rallied, but has fallen again this year as the oil price cap and plunging gas sales have started to bite, which is at least consistent with the probable path of the economy.  The government has stimulated the economy with fiscal measures as well as cutting interest rates, and the imposition of tight exchange controls and the prohibition of foreigners selling Russian property and shares have all held the economy up, so that the year-on-year fall in GDP in Q3 was "only" 3.7%.   

Oil and gas revenues fell 40% year-on-year in January:

Russia’s revenues from oil and gas exports dropped by nearly 40% in January as price caps and Western sanctions squeezed the proceeds from Moscow’s most lucrative export, the International Energy Agency said on Tuesday.

Russia’s oil and gas export revenues were $18.5 billion in January, 38% lower than the $30 billion Moscow received in January 2022, a month before its invasion of Ukraine, according to IEA numbers shared with Reuters.

IEA Executive Director Fatih Birol said Western measures targeting Russian energy exports had achieved their aims of stabilising oil markets and reducing Moscow’s revenues from oil and gas exports.

“Our expectation is that this oil and gas revenue decline will be steeper in the next months to come. And even more steep in the mid-term, as a result of the lack of access to technology and investment,” Birol told Reuters.

International restrictions imposed on Russia in response to the Ukraine war, including a $60 a barrel crude price cap imposed by Group of Seven countries, have left Russia’s Urals blend being sold at a heavy discount to Brent.

The 27-country European Union also banned Russian seaborne oil imports from December, and has placed sanctions on exports to Russia of technologies needed for oil refining. The United States and Britain have also imposed restrictions on Russian oil imports.

[Read more here]

Only 7% of Europe's oil now comes from Russia.  Building new pipelines, to sell gas into other markets, is possible, but will take years.  And oil and gas make up most of Russia's exports (the government has stopped publishing these data, but we know what is happening from data covering imports from Russia by other countries).  

I think Russian economic data will start to deteriorate from now on.  That's if they continue to be published.  

Russia's ban on oil sales to Europe won't work

 From a tweet by Robin Brooks

Russian cuts in gas exports to Europe worked in 2022 because they spiked prices. That same strategy won't for oil now as: (i) global recession means demand is weak, so no price spike; and (ii) even if there's a spike, the G7 cap means Putin gets NO windfall. Putin has no hand...

Russia and the oil price

I haven't analysed the Russian economy in detail for quite a long time, but given its importance, I've been looking at it again more closely.  I've revitalised my Russian coinciding index, which has a good relationship with real GDP, but is monthly and more up to date.  A coinciding index is so called because it is designed to coincide with the business cycle.  

Notice how closely correlated the oil price is to economic activity, except recently, when the war caused a downturn out of sync with the behaviour of the oil price.  Now, the thing is, Russia isn't getting the global oil price, because of sanctions.  The Urals oil price is just $52, compared with Brent at $78, and it's more than halved since March 2022, whereas Brent has only fallen 40%.  

Many indicators show a rebound from the post-invasion lows.  But I am convinced that this is temporary, and that the inexorable dynamic of falling oil output (because of sanctions), and a plunging price (because of deepening global slowdown) will drive Russia into a deep recession.  Russian overtures for peace are likely to become more frantic as this dynamic works out.

I'll keep you posted.

EU oil imports from Russia have nearly halved

 From Trading Economics

This is the volume (in tonnes); the price has also declined, by 30% since April.  Because the pipeline infrastructure isn't set to pump oil to other countries, this means a significant decline in forex revenue for Russia, hence the renewed slump in the rouble. 

As the German Embassy tweeted:

Germany has ended its dependence on Russian energy. Since August 11th, no coal has been imported. Natural gas imports have been reduced from 55% at the beginning of 2022 to zero. Oil imports dropped from 40% to under 20%, and will be phased out by the end of this year.

 No wonder Putin is kite-flying "peace" proposals. 

Russia PMI and business confidence up

 Business confidence actually fell in December, but it always falls (all that snow) at this time of the year, so my seasonally adjustment program reckons that seasonally adjusted, business confidence rose a trifle.  The headline PMI fell a little, but since it is quite "spiky" I extreme-adjusted and smoothed it, and that showed a rise in December.  

The Russian economy isn't going to fall until the oil price falls sharply, and that will only happen next year as the world tips into recession.  The oil price is down, and the trend is down, but there's still enough foreign exchange coming in to Russia to keep its economy ticking over.

The oil price is still trending down

The technicals point to a very clear cyclical turning point in the oil price.  The sooner we can move away from funding blood-soaked petro-state dictatorships, the better.  And as oil falls, inflation will fall too.  Of course, oil is falling because the global recession is starting to bite . . . .

Meanwhile, EV/PHEV sales globally are averaging 925K compared with 25K in H1: 2014.  For reference, total world car/light truck sales are ±70 million annually.  Have we passed peak oil?

Russia's PMI still holding up.

Russia's PMI fell at the start of its war against Ukraine, but then rebounded.  Business confidence fell, but didn't rebound.  

Putin increased pensions by 10%; imposed exchange control; and at first, the prices of its main exports, oil and gas (80% of total), rose as it shut down supply.  The problem is that the surge in oil/gas prices has plunged Europe into recession.  In the USA, the sharp jump in inflation (partly due to the rise in oil and gas prices) has led to the Fed upping the Fed Funds rate, which together will likely push the US into deep recession.  Out of the "Big 8" economies, only India has so far been holding up.  

So a world recession is likely.  As the recession deepens, fossil fuel prices will fall.  The surge in these prices has also begun an accelerated shift towards renewable energy in Europe.  Thus, short-term and long-term, Russia's export revenues will slump.  In the meantime, Western sanctions are biting ever deeper, leading to declining production, and the military call-up must also be affecting output.

I believe that the Russian economy will start to slide soon, with GDP going deeply negative.  We'll see.

Commodity prices to fall further

 It's obvious that commodity prices, as measured by the CRB index, have peaked.  Commodity prices follow the world growth rate, though of course there are obviously other factors, such as war, droughts or boycotts, which help nudge prices higher at times.  

The chart below shows my world diffusion index, which measures the percentage of monitored times series rising.   At zero, all series are falling, at 50% half are rising, and at 100% all are rising.  My world diffusion index monitors up to 303 time series, covering a wide range of different activities for most countries in the world.  It is not weighted by country GDP, unlike, for example, my calculation of the Big 8 PMI or industrial production.   

In my judgement, world economic activity is going to continue to slow, and so world commodity prices on average will too.  "On average" is a key qualification.  Some commodities, such as lithium, are still rising.  But oil and gas are falling, despite supply constraints, though the declines are not yet precipitous.